VELESTO: Cost Management Drives Earnings Beat Amidst Softer Utilization, Target Price Revised Upward

Velesto Energy Bhd (VELESTO) delivered first-half FY25 results that significantly surpassed expectations, with performance coming in 59% above TA Securities’ forecast and 67% higher than consensus full-year projections. This positive deviation was primarily attributed to the company’s robust cost management initiatives, leading to lower-than-expected operating expenses.

Performance Review

On a quarter-on-quarter basis, VELESTO’s revenue experienced an 11.0% decline in 2QFY25, alongside a 6.1% drop in Profit Before Tax (PBT). This was largely due to a softer jack-up rig utilization rate, which fell to 57% in 2QFY25 from 67% in 1QFY25, coupled with a slight decrease in the average daily charter rate (DCR) to USD123k from USD127k. Year-on-year, revenue saw a substantial 49.2% decrease, and PBT fell by 28.8%, primarily driven by the significant reduction in jack-up utilization from 98% in 2QFY24 to 57% in 2QFY25, despite an increase in average DCR from USD115k to USD123k.

In light of the company’s effective cost control, TA Securities has revised its total operating expenditure (OPEX) assumption downwards by 14-19% for FY25-FY27. Consequently, the investment bank has upgraded its earnings forecast for the same period by 27.1-32.1%, reflecting improved profitability prospects.

Future Outlook

Market insights suggest that demand for jack-up rigs in Southeast Asia is anticipated to ease in 2025 before a projected recovery in 2026. Day charter rates are also expected to moderate due to an oversupply of rigs; however, the anticipated pullback is expected to be less severe than the downturn experienced in 2016-2017 when oil prices dipped below USD50 per barrel.

Despite these near-term challenges, VELESTO maintains a strong earnings visibility, underpinned by an outstanding order book of RM1.2 billion, with 90% comprising firm contracts. Furthermore, the group has identified a pipeline of prospective contracts valued at RM4.3 billion, with over 80% linked to long-term arrangements. These opportunities are broadly distributed across the region, with Malaysia accounting for 62% of the share, followed by Thailand (27%), Vietnam (10%), and Indonesia (1%). The vast majority, 87%, of these prospects are drilling-related, reinforcing VELESTO’s core competency in jack-up rig services.

Recommendation and Valuation

Corresponding to the revised earnings outlook, TA Securities has maintained its “BUY” recommendation for the company. The target price has been revised upward to RM0.25 per share from the previous RM0.20 per share, representing a 25.0% potential upside. This revised target price is pegged to 9 times CY25 earnings per share (EPS), with an additional 3% ESG premium.